Week Ending 1st November 2015
NEFS Research Division Presents:
The Weekly Market Wrap-Up 1
NEFS Market Wrap-Up
Contents Macro Review 3 Eurozone United Kingdom United States Japan Australia & New Zealand Canada
Emerging Markets 10 China India Russia and Eastern Europe Latin America Africa South East Asia Middle East
Equities 17 Retail Financials Oil & Gas Technology Pharmaceuticals Industrials & Basic Materials
Commodities 23 Energy Precious Metals Agriculturals
Currencies 26 EUR, USD, GBP AUD, JPY & Other Asian
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Week Ending 1st November 2015
THE WEEK IN BRIEF
Interest rate cut for China Following last week’s news that economic growth for China fell below 7% for the first time since 2009, the People’s Bank of China chose to cut interest rates for the sixth time in the last year. The Chinese government have set a goal to maintain economic growth above 7%, and so the interest rate cut is hardly surprising given last week’s growth figures. Yet, as China’s economy becomes more developed, lower growth rates are inevitable, as diminishing returns to investment set in. Perhaps this prompted Premier Li Keqiang to admit that this goal may be unrealistic this week.
Mixed fortunes for Equities On the whole, this has been a rocky week for many firms’ shareholders. Coal producers have suffered, with falling share prices amid falling global demand, whilst fears of growing fraudulent practices within have caused share price falls within the Pharmaceutical sector. Moreover, with low US consumer spending, the Retail sector is continuing to struggle as the Christmas holiday season fast approaches.
Indeed, the coming two months will be crucial for the sector. One notable exception to this trend is the price of Apple’s shares, which rose sharply at the end of last week, and have continued to rise throughout this week.
Slowing growth in the US and Canada This week we learned that US GDP growth fell to 1.5% in the third quarter of 2015, down from 3.9% in the previous quarter. This news was preceded by the Fed Reserve’s decision to keep interest rates held at their current level at this week’s meeting, but surprised many, by suggesting that interest rates could rise as early as December. This prompted a significant fall in the price of gold this week, as well as causing a further fall in the EUR/USD. The Fed’s confidence in the domestic strength of the US economy is reassuring – perhaps the slowing growth in Q3 is merely a blip in the recovery of economy, which has been showing increased strength in recent times. Meanwhile, growth in Canada is also dwindling, as the economy narrowly sustaining positive GDP growth in the third quarter. With 0.1% expansion for the period, the Bank of Canada also chose to hold interest rates at the same level, which have now stood at 0.5% since 2011. Jack Millar
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NEFS Market Wrap-Up
MACROREVIEW Eurozone The unemployment rate of the Eurozone, as measured by the number of people who are actively looking for work as a percentage of the workforce, was released by Eurostat this week. The level of unemployment within the 19 countries of the Euro area fell slightly from 10.9 in September 2015 to 10.8% this month, as you can see on the graph below that illustrates unemployment rate over the past year. This is the lowest the unemployment has been since January 2012. Unemployment had been forecasted to rise to 11.0%, so this news came as a pleasant surprise for many. More specifically, the country with the lowest level of unemployment within the Euro area was Germany, who recorded a low unemployment rate of 4.5%. The largest decrease in the unemployment rate was in Spain where the unemployment rate fell from 24% to 21.4%, a decline of 2.6%. It is of importance to note that not all countries experienced a fall in the level of unemployment in their economy. In France for example, the unemployment rate increased from 10.4 to 10.7. However the overall
downward trend of unemployment is promising, hinting at a strengthening of the Eurozone’s economy. In other news, the forecasted inflation rate for October 2015 has been published. The level of inflation amongst countries within the Eurozone is calculated using the Harmonised Index of Consumer Prices (HICP). It has been reported that the level of inflation in October 2015 will be 0% - it is expected that there will be no change in average prices overall. We can compare this to the inflation rate from September 2015 which was -0.1%, so the Euro area is no longer experiencing negative inflation. However, the change in the inflation rate between September and October 2015 has only been small, and inflation is still well below the ECB’s target of 2%. Energy costs for consumers fell by 8.7%. According to the forecast for ‘core inflation’, which excludes energy prices, consumer prices in the 19 countries of the Eurozone are forecast to have risen by 1.0% for October. Kelly Wiles
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Week Ending 1st November 2015
United Kingdom Contractions in manufacturing and construction this week present a further strain to the rebalance of the economy. GDP growth for the third quarter has slowed to 0.5%, down from 0.7% in the previous quarter. The manufacturing sector has now had three consecutive quarters of contraction, falling by 0.5%. In addition construction output fell by 2.2%, its biggest fall in three years. Weakening demand from emerging nations have been exacerbated by the strong pound to weaken an already fragile sector. This goes against government’s pledge to rebalance the economy away from its reliance on household spending. Indeed of all the main sectors of the economy – services, manufacturing, construction – only services has surpassed its pre-crisis levels. However manufacturing and construction only account for a quarter of the UK economy. The dominant service sector, making up nearly three quarters of GDP, has grown by 0.7%. Boosts in the retail and finance sector have solely driven the economy this quarter. The concern with this is that, following the recession, economic growth has been heavily dependent on domestic consumption. Consumer spending continues to steer the economy, as illustrated below, with zero inflation and real wage growth continuing to support further spending. While this spells good
news for the general economic outlook, not all areas of the economy are benefitting equally. This week’s figures are likely to delay any interest rate rise as it presents doubts to whether the economy, now completely dependent on the service sector, will be able to support a rise, especially in the long run. Nevertheless it does mark the 11th consecutive quarter of growth and the GDP is set to grow at an annualised rate of 2.6%. In other news this week the US has stated it would not be interested in a trade agreement with a single nation like the UK. The US has openly expressed desire for UK to remain within the EU and have stated that the UK will then be subject to tariffs and lose out on any benefit from trade talks. This follows talks of a proposed free trade agreement between the US and Europe, known as Transatlantic Trade and Investment Partnership (TTIP). This aims to eliminate the majority of tariffs and trade barriers between the two continents, following similar agreements between emerging nations. This is a major blow to the “out” campaign, as one of its key arguments was that leaving the EU will allow Britain it to negotiate its own trade agreements with the likes of the US. Matteo Graziosi
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NEFS Market Wrap-Up
United States The big economic headlines in the US this week concerned third quarter GDP growth falling sharply and the Fed keeping interests rates close to zero. Real GDP fell from an annualised 3.9% to 1.5% in the July-September period. This was mainly due to a fall in inventory accumulation by companies, contributing to 1.4% of the drop. Nevertheless, the GDP headline is not indicative of solid consumer and business spending in the US. GDP, excluding the trade and inventory categories, rose at an annualised rate of 2.9% compared with last quarter’s 3.7% figure. Household purchases, which account for 70% of the US economy, rose at an annualised 3.2%. The economy is expanding at a “moderate” pace according to the Federal Reserve. Earlier this week, the Federal Reserve left interest rates unchanged within the 0-0.25% target range. It presented a hawkish statement stating that it will consider a rate hike at its December 15-16 meeting. The markets have priced in a 50:50 chance of a rate hike in December, possibly what the Fed was hoping for in case data presented at the next meeting does merit a rate rise. From the Fed’s perspective, the loosening of monetary policy
by the European Central Bank and the People’s Bank of China is positive as it contributes to global growth. However, there are ramifications for the US dollar. Furthermore, The Fed will be relieved that the Senate passed a bill raising the debt ceiling for the last time during Barack Obama’s presidency, eliminating risk of a government shutdown or fiscal crisis in December. Robust domestic spending and weakening global growth leaves the Fed with a dilemma. According to Janet Yellen, the head of the Federal Reserve, the decision to raise rates will depend significantly on the status of the labour market. Next week we have data on the US unemployment rate for the month of October. Unemployment data is a key metric in the Fed’s decision-making process. The unemployment rate is currently at 5.1% with policymakers estimating full employment at an unemployment rate of 4.9%. We also have data on the US trade balance which should demonstrate the consequences of the strength of the dollar, as exports become more expensive and imports cheaper, and weakening global growth, lowering exports. Sai Ming Liew
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Week Ending 1st November 2015
Japan Last Friday, after much anticipation and uncertainty from economists, the Bank of Japan (BoJ) decided to keep monetary policy unchanged. Governor Kuroda announced that the pace of government bond purchases in the economy will continue at a rate of ¥80tn per annum, signalling the Bank’s continued confidence in the current momentum of the economy to achieve its inflation target. The final decision came despite the BoJ simultaneously slashing inflation and economic growth forecasts for the year to 0.1% and 1.2%, respectively. Core inflation data for September, which excludes food prices, showed that prices fell by 0.1% compared to the previous year. This marks the second consecutive fall in the core consumer price index (as shown on the graph below) which has yet again faced downward pressure from oil prices falls. In light of this the central bank also announced it will delay achieving the 2% inflation target by 6 months to March 2017, a goal many analysts still consider to be too optimistic. Japan’s labour market conditions continue to remain tight, with the unemployment rate announced this week remaining at the expected 3.4% rate, as well as a slight rise in the participation rate to 60.2%. The latest jobapplicant ratio of 1.24 jobs for each jobseeker
indicates the nation may be at full employment. In theory, this would induce a wage-price spiral and increase inflation. However, with many firms hiring part-time workers to minimise additional labour costs, wage growth has been slow in a time when many companies are seeing record profits. Unexpected output growth in the manufacturing sector confirmed this week has reduced the likelihood of Japan falling into technical recession, but has also been overshadowed by lacklustre household spending data released on Thursday. Latest figures show that consumer expenditure fell by 0.4%, much lower than the anticipated 1.2% growth in household spending. It remains clear that boosting weak consumer confidence continues to be key in reflating the economy. In this respect, Abenomics so far has been unsuccessful, and is losing credibility quickly. The mixed signals in economic data this week, have become typical for Japan, and continues to make it difficult to assess the sustainability of its recovery. The speculation surrounding central bank action – expected as soon as midNovember – however, remains strong and kept alive by recent BoJ hints at reactive action in the future. Loy Chen
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NEFS Market Wrap-Up
Australia & New Zealand A lower than expected CPI rate may be just what is needed to prompt the RBA to raise the cash rate. On 27th October, CPI, forecasted at 0.7% for the third quarter of 2015, came in below expectations at 0.5%. The rate predicted over the year also failed to meet expectations, coming in at 1.5% instead of the 1.7% forecasted. Causes of the change include significant reductions in prices of vegetables, telecommunication equipment and services, and automotive fuel by -5.9%, -2.0% and -1.7% respectively. These changes offset jumps in the prices of international holiday travel and accommodation (4.6%), fruit (8.2%) and property rates and charges (4.6%). What does this mean for Australia’s all time low cash rates? “The number (CPI) is much lower than expected and presents absolute no obstacle for the Reserve Bank of Australia to lower rates,” said senior trader, Stephen Innes, of the OANDS Australia and Asia Pacific. The RBA was already contemplating lowering rates in order to counter the recent increase of variable rates by “The Big Four” which notably lowered consumer confidence. It is therefore no surprise that the news of lower CPI raised speculation over a further reduction, especially as Australia is far from its 2-3 percent CPI target.
Elsewhere, New Zealand’s trade deficit increased from NZD 1079 million in November to NZD 1222 million, as shown by the graph below, much larger than the NZD 822 million forecast. Since July, when the nation experienced its first monthly trade deficit of 2015 and its biggest 12 month deficit in six years, New Zealand has continued to witness a rise in the trade deficit over the preceding months. New Zealand is heavily dependent on international trade and is famous for exporting agricultural goods, due to its efficient operations in meat, dairy product, fruits and vegetables, fish and wool. The country relies on importing physical capital such as machinery and equipment as well as vehicles, aircrafts, textiles and plastic. This month exports fell by 8.3% (seasonally adjusted) with dairy exports falling by 12%. This was enough to offset the rise in exports of meat, wool and oil exports, while imports of petroleum, machinery and electronics remained strong. Despite the monthly fall, the trade gap is actually smaller now than it was at the same point in 2014 (NZD 1350 million). Over this time, imports have fallen by 1.3% as transport equipment fell 55%, (led by aircraft imports) and exports have risen over the year by 2.0%, mainly led by beef. Meera Jadeja
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Week Ending 1st November 2015
Canada Latest figures reveal that Canada has just about managed to sustain positive economic, with a GDP rate of 0.1% in August, as shown in the chart below. Although this matched economist’s expectations, there is a risk of growth falling negative, particularly as Canada’s economy is still delicate, recovering from recession. The Bank of Canada’s overnight rate of interest, known as its key policy rate, has been at its lowest level since 2011. Last week the Bank of Canada’s Governing Council made the decision to hold the rate at 0.5%. Justin Trudeau, the new Prime Minister, plans to take advantage of this by increasing government expenditure on infrastructure. Although this would increase the country’s budget deficit over the next three years, the aim is to boost growth and to also increase employment, with Canada’s unemployment rate having increased over the past year to 7.1% in September. Targeted areas for investment include social infrastructure, public transport, and green projects such as clean energy. Trudeau also plans to adjust income tax thresholds to make it more progressive. Expansionary fiscal policy could help to stimulate growth both in the short-
and long-run, and this also means that further interest rate cuts may not be needed. Nonetheless, high level policy decisions may not be sufficient to revive Canada’s economy. The Bank of Canada’s Autumn Business Outlook Survey reveals that more needs to be done. A key message from the survey is that there is a heavy reliance on foreign demand. The bulk of companies reported that they expected to see an increase in sales due to the improving US economy, and that they expected very little from domestic demand. At the time the survey was carried out, US GDP had sharply increased from 0.6% to 3.9% from Q1 to Q2 this year. However this week’s figures reveal that US GDP growth dropped to 1.5% in Q3. Although this is likely to be temporary and growth is expected to pick up in Q4, it highlights the variability of Canadian business’ expectations and hence the volatility of Canadian economic growth. Furthermore, prospects for resource based sectors are likely to remain subdued, as weaker commodity prices is an external headwind which Canada is yet to adjust to. Shamima Manzoor
Canada GDP rate
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NEFS Market Wrap-Up
EMERGING MARKETS China At the end of last week, the People’s Bank of China (PBOC) cut the interest rates for the sixth time in the last twelve months to support the economy, after growth slowed down to under 7%. Chinese Premier Li Keqiang said afterwards that China’s government won’t “defend to the death” its goal of an annual growth of 7% - just before the Communist Party gathered to discuss the 13th five-year-plan on Monday. However, while some Western newspapers already claimed China would join the Quantitative Easing policy, the PBOC states that the latest rate cuts were “conventional and normal monetary policy measures”, as such cuts could help boosting the real economy by lowering financing costs for enterprises and providing incentives for higher consumption. However, while the Chinese Central Committee held their meeting this week, one change has been announced already. After three decades, China’s government finally decided to abandon the One-Child-Policy and to allow each family to have two children. This policy was introduced in 1979 to stop the high population growth which could have led to overpopulation and food shortage. Amid an emerging demographic change that China is undergoing, loosening one of the most notorious interferences into Chinese lives seems logical for a few reasons. Firstly, the One-Child-Policy led to social and demographic problems as a dismal male female ratio and an aging population, which
eventually leads to higher healthcare costs. Traditionally, Chinese parents stay with their children when they get old, which puts enormous pressure on the individual as it has to pay for the living costs of at least three people. Secondly, China has begun to lose its comparative advantage in the production of labour-intensive commodities as it has transitioned towards becoming a middleincome economy. Yet a higher birth rate, which is expected to follow the relaxation of the policy, leads to a larger pool of cheap labour as wages will eventually drop in the face of bigger supply of workforce. The projection for Chinese population composition and growth is shown on the graph below. Additionally, a higher birth rate will eventually enliven domestic consumption. Professor Liang Jianzhang states that domestic consumption could grow to RMB75 billion. In fact, the producers of baby products could register a small upturn in sales very quickly. C&C Paper, a diaper manufacturer, and Beingmate, a company producing baby food, could note rises of 10 % each at the Shenzhen Stock Exchange. However, even an average of two children per family would hardly meet the replacement rate of China, which lies at 2.1. Therefore, the fear of enormous population growth in China is highly unrealistic. Alexander Baxmmann
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India In a report released on Thursday, India Ratings and Research (Ind-Ra) revised downwards its forecast for GDP growth, expecting India’s economy to now grow by 7.5% during the 2016 fiscal year instead of by 7.7%. The primary cause of this has been cited as weak agricultural growth as a result of a disappointing monsoon season. However the report is more positive about other sectors, suggesting that a surge in investment will support growth instead. Despite the agricultural sector becoming more resilient to monsoon shocks, a large number of producers are still dependent on rains which has resulted in sluggish growth for the sector, predicted at 0.9% for this fiscal year. Growth will instead be led by the industrial sector with IndRa expecting growth at 6.8% this year, 0.2 percentage points higher than its earlier forecast. This revival has been supported by a fall in the interest and inflation rate, coupled with early signs of recovery in the investmentconsumption cycle. The RBI lowered the interest rate just last month by an unexpected 50 basis points, the fourth adjustment this year, and the rate now stands at 6.75%. Although this has played a role in encouraging investment, India Ratings believes that the central bank has
almost ‘shut the door on further rate cuts’, which has led to them predicting that the average 10 year yield will be traded in the range of 7.27.3%. Further cuts in the interest rate actually seem likely, although it is doubtful that they will be anywhere near as sizeable as this year. The inflation rate was recorded at 4.41% in September and as the figure below shows, which is a lot lower than in September 2014, when prices increased by 5.63%. This was surely a satisfying figure for Raghuram Rajan, Governor of the RBI, who has previously stated that his main objective is to control inflation. The steadying rate is correlated with soft global commodity prices, including that of oil, along with the government’s commitment to lowering its fiscal deficit. Ind-Ra expects inflation to remain ‘benign’ for the rest of the year and is also positive that the 2016 deficit target of 3.9% is achievable. Data released on Friday shows that the fiscal deficit has already reached 68% of the year’s target but this reflects that spending is typically front loaded while revenues peak late in the year. Homairah Ginwalla
ERGI
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NEFS Market Wrap-Up
Russia and Eastern Europe Any form of hope for the Russian economy that was conveyed at the end of last week’s article has been promptly quashed this week with Anton Siluanov’s concern over still-declining oil prices. The Russian Finance Minister announced this week his predictions that Russia’s reserve fund will fall by 2.6 trillion Ruble by the end of the year. To put that in perspective, the fund was valued at ₽4.67 trillion and, thus, the fall will represent more than half of it. Undoubtedly, this would pose a threat to Russia – depriving them of the safety that a large reserve fund has afforded them thus far. Siluanov recognises this threat, admitting to parliament this week that “we lose stability without reserves”. It is no mystery where this prediction is coming from. The global slump in oil prices has hit Russia hard, with the economy struggling to foster growth elsewhere (the graph below shows how Russian exports have been affected recently). Previously, Russia has enjoyed its spot as one of the largest economies, accumulating its budget revenues from the production and subsequent exportation of oil and natural gas; this in turn has been used to cover any shortfall. The forever slipping oil prices – now at just under $50/barrel – then alienate Russia of any method to cover the shortfalls and leaves no other option but to dip into the reserve fund.
The real issue here is that constantly dipping into the fund is simply not sustainable. Siluanov announced this week that Russia had spent ₽ 402.2 bn of reserve fund money on covering the deficit this month; this is 2 times the amount spent in July and August combined. Reserve funds were also used to buy foreign currency in May to prevent the Ruble strengthening against the dollar – to little effect there as the currency continued to fall to its present level at 63.9 to the dollar. This news only further pressures Russia and has sparked a wide range of forecasts and predictions from analysts. Former deputy energy minister Vladmir Milov has gone so far as to say that the crisis facing Russia is much deeper and much longer-term than the 1998 crash which was massively helped by a devaluing Ruble, boosting exports and leading to a quick recovery. This time, however, real wages are down 10%, only 0.3% growth is predicted in the third quarter of 2016 and consumers are starting to see a decline in living standards. While the Ruble is devaluing this time too, it is doing little to help improve the economic situation which, to put bluntly, is pretty dire for Russia and Eastern Europe. Tom Dooner
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Week Ending 1st November 2015
Latin America It’s all to play for in Argentina’s Presidential election. This may come as a shock to some, as at the beginning of campaigning Daniel Scioli of the centre left Peronist Party, successor to the incumbent President Fernandez was set to be a clear winner. The opinion poll of first-round voting intentions published in the newspaper ‘Página 12’ on 25 September put Daniel Scioli first (on 41.6%) and Mauricio Macri in second place (on 29.2%). Even in the exit polls Mr Scioli looked set to edge over the finish line. In order to win outright in the first round, a candidate needed 45% of the vote or a minimum of 40% as well as a 10point lead over the nearest rival. However neither Mr Scioli nor the next best contender Mr Macri of the Centre Right Republican Proposal Party could achieve the outright win in the first round.
the Argentinean Government. Further clashes with significant organisations have occurred in recent years as the ‘official’ level of inflation announced by the government is 14.5%, yet in 2014 the World Bank calculated the economy’s inflation at 28.2%. It seems astonishing that in a one year period that inflation could have dropped by 13.7%. (The graph below shows the disputed inflation figures, as produced by INDEC).
The run-off election on the 22nd November will be the first time an Argentine election will be decided by a second round. Such political turmoil is not what the country needs at this moment in time. Although Argentina is the thirdlargest economy in Latin America, growth has slowed in recent years, with GDP growing by only 0.5% last year. Further downsides to their current economic woes are that the IMF has predicted that the economy will shrink by 0.7% in 2016, although of course this is disputed by
The uncertain outlook for the future of Argentina’s economy may be here to stay. President Fernandez is set to stand down from the post on the 10th December, and it will be interesting to see how the election plays out. In my opinion, Mr Macri could just edge it if he can gain the support of Sergio Massa (third place and ex-Peronista).
This situation is all the more worrying for Argentina as the high level of inflation has come as a result of pervious miss-management short term economic policy, rather than being caused by strong demand from consumers. So I think fair to say whoever wins the Presidential election is set to face significant economic problems.
Max Brewer
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NEFS Market Wrap-Up
Africa This week the African Standby Force (ASF) went through its final joint exercise in the South African bush, comprised of the united efforts of 5,400 African soldiers. Seen as one of the most ambitious military unions in history, 25,000 African troops will be deployed across the continent from January 2016. The aims of the ASF, as envisioned by African leaders over a decade ago, is to unite the continent with one military force and reduce Africa’s reliance on Western nations by handling border disputes, rebellions and genocide threats with an internal force. However the ASF still faces difficulties. It requires all 54 members to dispatch troops exactly when they are needed. It also requires adequate funding. £650million is still needed for the next few years before Africa can find it itself. European economists however predict that if the ASF is successful, Western powers will be able to minimise external involvement and instead invest the money elsewhere. A stable Africa will increase the likelihood of democratisation, leading to greater trade prospects and global economic growth. Additionally, investment into a large military will be greatly beneficial for the continent, in generating GDP and providing jobs for unemployed young men.
In a recent India-Africa summit, India made clear its intention to deepen political and economic partnerships with over 40 African countries by pledging $10 billion to support Africa’s development. This will hopefully encourage trade between Africa and India, from which both can benefit greatly. Whilst many applaud India, others suggest that it is merely trying to compete with China, which has ploughed billions of dollars into the African economy, and whose trade with Africa numbers $200 billion. However politically, India and Africa are both very keen to reform the UN, in regards to fairer trade laws and the Security Council. There has been a large amount of optimism about the recent Tanzanian elections, which saw John Magufuli (CCM party) come to power. A former farmer known as ‘The Bulldozer’, he is popular for building numerous roads across the country, amongst other infrastructural projects. He has spent many years fighting corruption, particularly in the police force, and will focus his presidency on reducing unemployment and fighting power shortages. Overall many view his victory as a long-term economic success for the historically peaceful country. Charlotte Alder
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South East Asia In recent times, Indonesia, South East Asia’s largest economy, has been notorious for its strict protectionist policies, which refers to high levels of quotas and tariffs on imports from other countries. As of October 2015, Indonesian President Joko Widodo fears Indonesia will be left behind and has declared his intention to join the TPP (Trans-Pacific Partnership), a proposed trade agreement consisting of countries such as Singapore and the US, which seeks to promote economic growth and living standards. The turnaround comes after the central bank of Indonesia cut its 2016 forecast GDP growth for the second time this year and now expects yearly growth of 5.2%-5.6%, with Trading Economics predicting that the slowdown could be far greater, estimating that growth could reach a decade low of 4.1% in 2016, shown in the graph below. President Widodo, who took power a year ago amid promises of change, has certainly stumbled in recent months, and joining the TPP will certainly give the citizens of Indonesia greater optimism for their future economy. To date in 2015, Indonesia retained its topthree position in Asian manufacturing behind
China and Vietnam. Competition in enticing multinationals to set up in Asian countries more quickly than ever before; Indonesia received 155 foreign direct investment (FDI) projects last year in comparison to a staggering 241 FDI projects for Vietnam, who are proving to be one of the world’s best performing FDI locations recently. However, Indonesia must consider which countries will be their major trading partners in the future. In particular, Mr Widodo’s trip to Washington has been in the public eye, after it was announced in September that the US was the leading destination for non-oil and gas exports, with trade of 1.28bn, overtaking China. On the other hand, there have been signs Indonesia will put China as their driving force to revive growth, after they put Japanese investors to one side and agreed a $5 billion contract for a high speed rail link to China. With their five year economic plan and released estimated figures of 7% growth, China seems to be a world leader missing in the TPP, so whether this trade deal will be enough to pick up the slack, is questionable. Alex Lam
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NEFS Market Wrap-Up
Middle East This week started off with Klaus Schwab unveiling the 2015 global summit of the World Economic Forum in Abu Dhabi. He predicted the imminent fourth industrial revolution, urging an enthusiastic audience at Abu Dhabi to show agility and entrepreneurship to survive the changes coming. The downward trend of oil prices has complicated matters for the GCC countries. Though the current low oil price environment has posed strategic challenges, it has also provided opportunities. The key challenge lies in rebalancing government spending to match a lower oil price. Regional governments need to continue to spend on development projects and infrastructure, however the reality of lower oil revenue needs to be aligned with lower government spending and increased non-oil GDP growth. Several of the major Arabian Gulf oil producers have slashed their November prices for Asian buyers in response to a weakening prompt crude demand and as competition in an oversupplied market heats up. In one clear sign of stiffening competition, Kuwait, Iraq and Iran all cut their official selling prices by steeper amounts than Saudi Arabia. In the UAE, business borrowers are steeled for a tough year ahead following a slew of warnings from banks over a looming credit squeeze. As the funding pool shrinks small firms are already
struggling. The reduction of government deposits in regional banks is drying up the liquidity normally available to businesses, thus a tighter credit environment is affecting their small business sector. Kuwait’s ruler phoned officials in the oil-rich state to seek alternative revenue sources and reduce public expenditure after state income dropped 60 per cent due to a sharp slide in crude prices, while spending remained the same without any reduction leading to huge deficits. Falling prices of oil has reduced Oman’s government’s revenues, causing a deficit over the first 8 months as compared to last year's surplus. Nevertheless, the executive president of the Central Bank of Oman told the Reuters Summit that Oman will continue to invest in strengthening its economy. Tarek Amer, Egypt’s elected central bank governor takes up his post amidst another flareup of the country’s never-ending currency crisis. As the chairman of NBE, he entirely covered NBE’s provisions for non-performing loans and almost tripled net income. It is to be seen if he can turn the economic tide of the country in the new political arena and prepare for the approaching fourth industrial revolution. Sreya Ram
RKETS
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Week Ending 1st November 2015
EQUITIES Retail Diminishing levels of consumer expenditure growth, compounded by the apparent disconnect between falling oil prices and increased consumer spending, resulted in a bleak outlook for retail equities this week. This comes at a particularly tumultuous time for the sector, given the ongoing concern following Walmart’s disappointing predictions for the coming years. According to the US commerce department, consumer spending has remained almost flat in the month of September, rising only 0.1%, less than the 0.2 % expected from analysts. As a result, retail stocks have floundered. The low inflation environment currently being experienced by Western economies has resulted in what Citigroup analysts have dubbed a “ stormy time “ for the sector, which is likely to experience continued fluctuations in the coming months due to the holiday season. The increase in consumer spending from the holiday season may not, however, be enough to ameliorate the fall across the consumer sector following the aforementioned Walmart fiasco. At the time of writing, Walmart shares are down 14% following their revised predictions, with target and Best-Buy down 4%
and 6% respectively. Whilst, in all actuality, Walmart’s weaker than expected predictions for 2017-18 have little bearing on the viability of the company as a whole, this does not necessarily mean that Walmart, or the retail sector as a whole, offers value for prospective investors. This view is largely contingent on an analysis of the Earnings Before Interest and Tax (EBIT) ratios of leading retailers, which may not be achievable in coming years for a number of reasons. According to analyst Seth Sigman of JP Morgan, modern retailers face a considerable number of cost pressures on their business, as perfectly exemplified by Walmart, Amazon, and Nike (WAN). WAN, like an abundance of other retailers, have been investing heavily in order to retain a competitive edge in a tough market, with billions having been ploughed into schemes such as employee training and online modernisation. As such, with downwards pressure on margins, a flat economy which displays little to no inflation, and the failure of lower commodity prices to translate into retail sales growth, the outlook for retail equities remains bleak. Jack Blake
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NEFS Market Wrap-Up
Oil and Gas Oil prices closed higher on Friday after the US oil rig count fell for a ninth straight week, indicating crude production could decline in coming months. In the latest session, Brent crude (LCOZ5: ICE EU) was up $1.05 at $49.85 a barrel. West Texas Intermediate crude (CLZ5: NYMEX) closed up 56 cents at $46.59 a barrel, posting its first positive weekly gain in three. Other energy’s equities have also shown similar gains, as shown below. However, The FTSE 100 oil and gas group on Friday capped a difficult week for Europe’s biggest energy companies, reporting a sharp decline in underlying earnings during the third quarter, following crude’s collapse. The slide in oil prices since June last year, from a peak of $115 a barrel to less than $50 now, has battered revenues and profits across the energy industry, with US and European companies this week all reporting steep falls in profits or losses for the third quarter. Royal Dutch Shell (RDSA:LSE), decided to axe a Canadian oil sand project this week, one that was already well under way; the sites were being cleared, major equipment procured, accommodation for staff was being build and work was being started on wells. But Shell is not alone - it might have made the biggest U-turn
on a new project since the market rout, but the oil slump has been brutal to companies around the world, forcing them to slash spending, lay off employees and delay projects. Eni SpA (ENI: MIL), Italy’s largest oil producer, also reported a net loss for the third quarter on Thursday. France’s Total SA (FP:PAR) posted a profit of $1.08 billion, 69% lower than a year earlier, as rising oil and gas production and growing profits from its refining operations helped to offset the slump in crude prices. Amid the oil price rout, however, there are two US oil and gas groups whose earnings have exceed analysts’ expectations. ExxonMobil (XON: NYQ) and Chevron (CVX: NYQ) on Friday reported big falls in third-quarter profits, with Chevron’s earnings per share for the third quarter down 63% at $1.09, compared with a 47% drop at Exxon to $1.01. But this still came as a surprise, as Analysts on average had expected a profit of 89 cents per share for Exxon, according to Thomson Reuters I/B/E/S. They have been the only winners this week - in New York, Chevron’s shares rose 1.1% to $90.88 and Exxon’s shares were up 0.62 per cent at $82.74. Andrea Di Francia
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Week Ending 1st November 2015
Financials This week saw many financial institutions release their third quarter results, including three of the UK’s “big four” retail banks. Most notably, the newly announced CEO of Barclays, Jes Stanley, will face a challenge as the bank reported a fall in pre-tax profits of 10% to £1.4bn causing the share price to fall 7.5% on Thursday. In the USA, the NASDAQ Financial 100 index reacted positively to the news that the Fed will hold interest rates constant for another quarter, with the index rising 2.7% on Wednesday. Deutsche Bank [DBK] had a particularly poor week, posting a Q3 loss of $6bn. On top of this, the bank announced it would not be releasing any dividends for the next two fiscal years as it executes its “2020 strategy”. As can be seen in the graph below, Thursday’s news bought a drop of 7% in the share price. The bank’s recently appointed Co-Chief Chairman, John Cryan, assured shareholders the bank will continue with its strategy. This involves cutting 9,000 jobs, and shrinking the size of its investment bank in order to focus on areas such as asset management. These cuts will see the company exit 10 countries and save around
$3.8bn in expenses. Although the short term will see the bank struggling, this simplification will improve long term profits at the bank, perhaps making it one to watch in the future.
Insurance and asset management firm, AVIVA, announced positive Q3 results. New business for the life insurance division, the main revenue stream of the company, increased by 25%. Whilst, although the AIMS fund, the flagship fund of the asset management department, experienced flat returns for the quarter, the FTSE 100 dropped 6.6% in the same time period, showing a relative success for the fund. Furthermore, any scepticism around the firm’s acquisition of its rival, Friends Life, has been dampened by the news the transaction is taking place as expected. The market reacted favourably with AVIVA’s share price rising 2% on Wednesday. If the acquisition continues as expected coupled with the company’s strong capital position and the increasing demand for insurance in China, I believe there are good prospects for the business to grow in the future. Sam Ewing
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NEFS Market Wrap-Up
Technology As markets closed on the 23rd of October, Google shares bounced back by 12% to $727.47, a huge recovery from a weaker performance throughout that week. Meanwhile, Infineon, a German semiconductor company, saw a drop in share prices from $11.90 to $11.20 – only a minor 5% fall. On Thursday, Samsung Electronics announced a $10 billion share buyback scheme for the oncoming year – a value at 5% of the company’s total market capitalisation. The proposal arose as a result of heavy pressure from shareholders over their unhappiness with Samsung’s stalling profit growth, with the South Korean company radically losing market share in smartphones over the past two years. The proposal will see Samsung buy their own shares from investors who wish to sell, and then cancel all these bought shares. Through doing this the company will attain fewer assets due to fewer shares in issuance, resulting in investors holding a larger slice of the equity, and thus boosting their per-share earnings and dividends. Furthermore, Samsung promises to return around 30 to 50 percent of free cash flow to shareholders over a three year period, primarily through these dividends. The news was well met by appeased
investors, with share prices jumping 4% upon announcement. In complete contrast, their rivalling company, Apple, had shareholders agitated at the beginning of this week, with news of the German chipmaker Dialog taking a loss of 20% in stocks as a result of their recent financial report revealing weak performance. Being a key supplier to Apple, it undoubtedly had an impact on the tech-titan, with shares closing almost 3% lower on the day, as investors fretted about the disappointing news. However, this seemed only a temporary fall for Apple, with the support of a huge boost of 10.5% in share prices over the last weekend, from $671.70 to $742.70, asserting strong performance throughout the week, with Apple’s shares closing at a solid $120.6 on the 30th October. This places Apple in a position where iPhone sales numbers in this final quarter will be critical to their yearly performance. In July, the company posted a 35% increase in unit sales of the product, to a total of 47.5 million devices, ensuring shareholders with certainty over Apple’s prime product. With upcoming increases in spending over this last quarter, it can surely be said that this trend will carry. Daniel Land
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Week Ending 1st November 2015
Pharmaceuticals There have been multiple scandals over the past few months in the Pharmaceutical industry as price-gauging and fears of growing fraudulent practises have surfaced. Growing speculation over behaviour by Canadian Pharma giant Valeant Pharmaceuticals caused a 47.13% fall in its share price in just two weeks as shown by the graph below. On the 21st of October, Citron Research exposed fraudulent revenue boosting tactics used by Valeant with partner company 'Philidor'. Reportedly, they inflated their orders and inventories in order to boost reimbursement payments by insurers and mislead investors, leading to subsequent investigations into the company's activities. Another clever accounting tactic called 'tax inversions' have recently caught the attention of the Obama administration. Inversions are a growing trend that allows US companies to do merger deals with foreign businesses in order to move their tax base overseas and escape the high tax rates and global reach of the US tax system. This comes as a result of the US's unusually high worldwide taxes on profits; even if they are only taxed when brought home. Yesterday Dublin-based Botox-maker, Allergen, confirmed suspicions of a takeover by Pfizer, who famously failed in their hostile bid over AstraZeneca in 2014. A move which increased its shares by more than 6% in an
afternoon, the seemingly premium acquisition will not only call for lower taxes but also result in profitable synergies. Such a move would echo the activity at the start of the year by Medtronic, one of the world's biggest medical technology companies, who spent $49.9bn in their take-over of Ireland-based Covidien, which meant that they could slash their tax bills by re-domiciling overseas. It hasn't always been so easy though and US crackdowns on such deals have managed to scupper such moves. Attempts last year by the treasury resulted in anti-inversion measures that sought to make deals less profitable. It forced AbbVie in October of last year to abandon its proposed ÂŁ32bn takeover of Jersey-registered drug maker: Shire. However, recent endeavours to stop tax inversions are likely to fail as the republicans may veto the next proposal which Obama, the democrats and the US treasury are trying to push through congress. Confirmation in July by the senate that up to 25 more US groups are considering inversions confirms that it is perhaps a great time to invest in non-US smallcap Pharma. Sam Hillman
Valeant Pharmaceuticals International Inc
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NEFS Market Wrap-Up
Industrials & Basic Materials The slowdown across global economies is aggravating a coal glut that has driven prices for the fuel to the lowest level in eight years, with the Dow Jones Coal Index losing 33.6% in the past week. Coal prices have collapsed amid a broader slump in commodities, where the current oversupply of coal has been compounded by ongoing global economic uncertainty. Weak power consumption growth across Asia and subdued global trade flows are undermining prices. Goldman Sachs and Morgan Stanley have cut their coal price forecasts from 2016 to 2018, citing soft demand and ample supply. Some of the firms whose business are heavily exposed to coal have faced a substantial drop in their share price, such as Arch Coal Inc (22.9%), Peabody Energy Corp (-21.8%) and Consol Energy (-21.2%). We will be focusing on Consol Energy where they are looking to sell up to $2.3bn in Coal and Natural Gas Assets. The company hopes any sales can raise more cash and help deleverage its balance sheet as the company continued to weather the commodities downturn in the third quarter. The proceeds will also pay down debt and accelerate the separation of its coal and natural gas divisions.
Consol reported their financial results early this week, and net income came in at $119 million for the quarter compared to a net loss of $2 million for the same quarter last year, and EBITDA at $374 million, exceeding the $201 million for same period a year ago. Going forward, the CEO of Consol remains focused on achieving free cash flow base plan over the next 15 months through additional gas hedges and multi-year coal contracts which have significantly reduced operating costs, corporate overhead, legacy liabilities, and accelerated Consol’s asset sale monetization program. Consol hopes its growing position in the Utica Shale will become the primary focus of the development plan and a greater and greater contributor to production growth. The industry is cyclical and commodities are taking a huge beating now. Could the share prices of companies like Arch Coal and Consol be attractive for one to accumulate? There is still a lot of uncertainty in the industry and the global economy as a whole, and until there are signs of improvement to the whole landscape, I believe there will be opportunity to accumulate for cheaper. Erwin Low
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Week Ending 1st November 2015
COMMODITIES Energy The Energy Information Administration (EIA) reported on Wednesday 28th a fifth straight weekly increase in crude supplies, but also stated that supplies of gasoline and distillates declined, as many energy commodities made a resurgence this week. Colin Cieszynski, a chief market strategist at CMC Markets (a UK-based financial derivatives dealer) stated that “[traders are] still responding mainly to changes in the supply and demand outlook”. WTI Crude Oil prices had rallied by 6.3% on Wednesday, and “coincided with a second increase in a row in implied demand,” he said. That helped offset losses seen earlier in the week, following news that the US government will sell oil from its Strategic Petroleum Reserve starting in 2018. However Crude Oil futures - contracts in which the buyer agrees to take delivery of a specific quantity of crude oil at a predetermined price on a future delivery date – slipped this Friday as economic data has raised worries about US energy demand, but US prices were still poised to post gains for the week and month on growing expectations that crude production will soon decline.
December Brent crude (LCOZ5), on London’s ICE Futures exchange edged up by 22 cents, or 0.5%, to $49.02 a barrel. Tracking the mostactive contracts, prices were trading around 2.2% higher for the week, up 1.4% for the month. Moreover, while December West Texas Intermediate crude (CLZ5) traded down 16 cents on the New York Mercantile Exchange, its most-active contracts also traded up around 3% for the week. There were also some solid indications this week that oil companies are taking a hit from the low prices. BP plc (NYSE:BP) declared a quarterly dividend on Tuesday 27th October, with Investors of record on being given a dividend of $0.60 per share on Friday 6th November. Royal Dutch Shell PLC (RDSB.L) also announced a $0.47 dividend per share on October 28th. The fact that these oil companies have shown low dividend yields clearly reflects sharp declines in upstream profits – profits from the exploration and production of oil and gas as low energy prices take hold in the balance sheets of major firms. Harry Butterworth
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NEFS Market Wrap-Up
Precious Metals This week saw China cut its one year bench mark interest rate by 25 basis points to 4.35%. We have also seen European Central Bank (ECB) President Mario Draghi announce that the central bank would not cut rates, but at the same time, he strongly hinted at that they would act later this year. This has led to gold price channelling within a range building higher peaks and lower troughs, but assumes an increasing trend. As mentioned last week, gold is seen as a reserve and as a store for value during economic uncertainty and with the increased possibility of an interest rate hike at the end of the year in the US, gold prices have taken a tumble from 1180.46USD/oz. to 1145.43 USD/oz., a 3% drop in 24 hours, the lowest price in the last two weeks, as shown in the chart below. Higher interest rates curb the appeal for gold as the shiny metal does not pay interest or give returns on assets such as bonds or equities. Gold’s sensitivity to the US data releases is likely to continue and its path from here is heavily linked to the decision by the Fed’s on the pending rate hike.
A stockpiling demand for gold in China during this period ahead of the peak consumption season, Chinese New Year, can be attributed to the already attractive prices, looser monetary policies and the devaluation of the Yuan earlier this year. This has seen the net import of gold from Hong Kong increase for the third successive month in September, as looser monetary policies and inventory holding have spurred buying. The slowdown in China should make the precious metal more attractive for Chinese investors. In other news, prices of platinum and palladium fell on the 26th Oct, platinum falling 0.42% and palladium falling 1.4%. All of the precious metals have seen a decline on a five-day trailing basis and this can be attributed to a stronger outlook of the US economy and the strengthening of the dollar. Given the uncertainty in the Fed’s decision and the growing demand for gold in China and Russia due to financial and political instability, it is likely that gold prices will continue to remain bullish and would expect to rebound. Samuel Tan
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Week Ending 1st November 2015
Agriculturals Moving on from last week’s fluctuations in corn and coffee, this week has been yet another thorn in farming industry. The weather is causing unpleasant surprises, leaving it nearimpossible for some of the growers to organise irrigation or drainage and minimise reduction of the yield. Also, the IARC findings stirred up the cattle industry. Last weekend was signified by dry weather in most regions of US, Australia and central Russia, while surprisingly, areas around Texas secured some rainfall - heavy enough to wash away newly planted seeds. The areas concentrating on wheat growth provided a significantly lower supply of the good and failed to meet the regular demand by the beginning of this week. As evident in the Figure below, the prices didn’t take long to shift upwards from $490.50/bu on 23rd October to $515.00/bu on 29th October. If the weather conditions remain unfavourable in some regions for much longer then a lower yield in spring will result, as dry soil is a very hostile environment for newly planted seeds to develop roots. However, we may soon witness a decrease in demand and prices as the weather stabilises.
Weather is by far not the only concern in today’s agricultural market. On 26th October the International Agency for Research on Cancer (IARC) concluded that consumption of red meat is ‘probably carcinogenic to humans’, while processed meat is now referred to as ‘carcinogenic to humans’. The cattle prices remained considerably stable over the last week but beef price was influenced by the IARC statement and slightly depreciated afterwards. It is unlikely that there will be a great decline in the cattle price over the next few weeks for a number of reasons; the initial response to this week’s information has not resulted in a sudden decline in demand and, thus, is less unlikely to accelerate with time as the consumer tends to forget and belittle the ‘probably’ factor. Also, the difficulty in finding a nutritious substitute for red meat in the short term is another issue. Recent market news illustrates this prognosis as the price on 26th October declined by 1.62% overnight and seems to be recovering again – already up by 2.50% on 28th October (reflected in the Figure). Goda Paulauskaite
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NEFS Market Wrap-Up
CURRENCIES Major Currencies As forecasted in last week, the euro has continued to come under increasing pressure against the dollar, and the short recommendation for this pair came into fruition during late Wednesday’s trading when the price plummeted by over 1.5% in a matter of minutes. Whilst the euro has now regained some ground, I still have a bearish view on this currency and I believe support levels are going to continue to be tested. We have now seen the pair fall from the 1.35 level to 1.1 in the last 2 weeks alone, losing close to 20% of its value. The EUR/USD price tumble was caused by the Federal Reserve boosting the possibility of a December rate lift off. Following a 2 day meeting, policy makers voted to leave rates at the 0-0.25% band, where they have been for the 7 years since the financial crash. However, the FOMC gave its clearest indication yet that there is a serious possibility that an upward move in short term interest rates will happen soon, lending confidence to a December rate hike. In its announcement, the FOMC said it would look at incoming data in deciding whether to raise rates at the ‘next meeting’. The last time the Fed used this phrase in 1999 under then Chairman Alan Greenspan, it then raised rates
at the next meeting. The market implied odds for a December lift off are now just slightly better than 50%. Higher interest rates increase the value of a country’s currency relative to countries offering lower interest rates. This is achieved through being able to attract foreign direct investment, increasing demand for the currency in question, thus increasing its value. The market reacted quickly to the announcement and immediately began selling off EUR/USD, where the pair eventually found support at 1.092. The Euro has gradually regained ground against the dollar, boosted by better than expected German unemployment rates on Thursday. Dollar bulls also evidently became more cautious ahead of next week’s key economic data releases, where we will see the US manufacturing index, unemployment rate and Non-farm payrolls figures. These releases will give the FOMC its first indication of how likely a December lift off is, so we will continue to see increased volatility in EUR/USD. The pair finished the week just above 1.10, slightly below the week’s opening price. Adam Nelson
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Week Ending 1st November 2015
Minor Currencies The Japanese Yen has had a turbulent time the past month, with lows against the dollar nearing 118.00 and highs around the 121.50 mark. This week was no exception to the volatility. The Yen started the week strongly with a clear downward trend in the USD/JPY pair; this was likely to be mainly correctional after a very sharp uptick in last Friday’s trading. The price movement then flat lined upon reaching the 120.25 support level, and the pair traded within a tight range for 24 hours meeting resistance at the 120.50 price, as shown in the graph below. The Federal Reserve’s monetary policy statement caused some excitement in the market after claiming they will “consider tightening policy” at December’s meeting. This caused the Yen to weaken against the USD dramatically at 6pm on Wednesday, which meant the USD/JPY pair smashed through the previous resistance line to close at over 121.20 at 7pm. However the excitement was shortlived. The bears re-entered the market after further scrutiny of the Fed statement realising no credible promises had been made. More importantly for the Yen, the Bank of Japan (BoJ) released their Monetary Policy Statement at 3am on Friday. They stated that they would keep their current policy unchanged despite massively missing their inflation target of 2%,
with prices rising only 0.1% this fiscal year. The reason for adding no further stimulus was due to concerns a weakened Yen could harm consumers. This sentiment seemed to work with traders causing the USD/JPY pair to fall over the next few hours to reach lows of 120.27 before some minor correctional upward movement. I am expecting the Yen to strengthen further next week given the clear signals sent out by the BoJ this Friday. Given there is no big news due out from the Fed next week, the downtrend in the USD/JPY pair should continue and there is fairly strong possibility the 120.00 support level could be broken. If broken, there will be a sharp downswing in this market as traders’ stops get hit. Elsewhere in the currency market, the Swedish Krona had an interesting week. Sweden’s Riksbank expanded its quantitative easing programme partially in an attempt to weaken the Krona but the market didn’t deem it enough to have any effect against any further European Central Bank QE. The Krona in fact rose 0.7% against the Euro due to the seeming lack of credibility from Riksbank to keep their currency down. Will Norcliffe-Brown
USD/JPY 1 Hour Candlestick (Source: OANDA)
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NEFS Market Wrap-Up
About the Research Division The Research Division was formed in early 2011 and is a part of the Nottingham Economics and Finance Society (NEFS, formerly known as NFS and UNIS). It consists of teams of analysts closely monitoring particular markets and providing insights into their developments, digested in our NEFS Weekly Market Wrap-Up. The goal of the division is both the development of the analysts’ writing skills and market knowledge, as well as providing NEFS members with quality analysis, keeping them up to date with the most important financial news. We would appreciate any feedback you may have as we strive to grow the quality and usefulness of weekly market wrap-ups.
About the Research Division
For any queries, please contact Jack Millar at jmillar@nefs.org.uk Sincerely Yours, The Research Division was formed in early 2011 and is a part of the Nottingham Economics Jackand Millar, Director of the (NEFS, Nottingham Economics Finance Society Research Division Finance Society formerly known &as NFS and UNIS). It consists of teams of analysts closely monitoring particular markets and providing insights into their developments, digested in our NEFS Weekly Market Wrap-Up. The goal of the division is both the development of the analysts’ writing skills and market knowledge, as well as providing NEFS members with quality analysis, keeping them up to date with the most important financial news. We would appreciate any feedback you may have as we strive to grow the quality and usefulness of weekly market wrap-ups. For any queries, please contact Josh Martin at jmartin@nefs.org.uk.
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